(2023-05-01) Alexander Change My Mind Density Increases Local But Decreases Global Prices

Scott Alexander: Change My Mind: Density Increases Local But Decreases Global Prices. Matt Yglesias tries to debunk the claim that building more houses raises local house prices. He presents several studies showing that, at least on the marginal street-by-street level, this isn’t true.

I’m nervous disagreeing with him, and his studies seem good. But I find looking for tiny effects on the margin less convincing than looking for gigantic effects at the tails. When you do that, he has to be wrong, right? (population density)

The two densest US cities, ie the cities with the greatest housing supply per square kilometer, are New York City and San Francisco. These are also the 1st and 3rd most expensive cities in the US.

the denser an area, the higher its house prices:

Could this be reverse causation - ie New York is very dense because its prices are so high (which incentivizes developers to squeeze the most out of every parcel of land)? Yes, obviously this is part of the effect. But equally obviously, it isn’t the full effect.

nobody moves to Manhattan for the harbor. They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife. This induced demand effect is so strong that it overwhelms the fact that Manhattan has millions more houses than the empty North Dakota plain.

So I don’t understand why Matt believes that building a few new apartments in some city - a very small move along that spectrum - would do anything other than make local prices go up.

if becoming just as big as Manhattan or London would make Oakland more expensive, shouldn’t we assume that a little step in that direction would make it a little bit more expensive? Wouldn’t the alternative be some kind of highly unparsimonious pricing function like this?:

But doesn’t induced demand violate the economic law of supply and demand?

I think the missing insight is that there’s some pool of geographically mobile Americans who are looking for new housing (or who might start looking if the right situation presented itself). These people have various combinations of preferences and requirements

Right now, more Americans prefer to live in big cities than there are housing units in big cities

The fact that big cities remain more expensive than small villages suggests that there are many of these people and they’re currently under-served.

So if Oakland became bigger, it would become a more appealing destination for these people at some rate (making it more expensive) and get more supply at some rate (making it less expensive). Since existing big dense cities are all very expensive, most likely in current conditions the first effect would win out, and Oakland would become more expensive. But it can’t do this forever - at some point, it will exhaust the pool of Americans who want to move to big cities

if Oakland built more houses, this would lower the price of housing everywhere except Oakland: people who previously planned to move to NYC or SF would move to Oakland instead

The overall effect would be that nationwide housing prices would go down, just like you would expect. But the decline would be uneven, and one way it would be uneven would be that housing prices in Oakland would go up.